Plan B for the Eurozone

Derk Jan Eppink // Tue, 22. May 2012

Tomorrow, European leaders will yet again convene for a summit in Brussels. It will be the summit of blackmail. In the midst of a political vacuum, Greece steers towards bankruptcy. Greek politicians blackmail the EU: 'more money, or else you'll see a chaotic default which triggers the end of the euro'. France blackmails Germany: 'no fiscal pact without a growth pact'. Spain and Italy demand euro bonds guaranteed by the AAA countries. German chancellor Merkel is isolated. All the spend thrift countries are ganging up against Germany (and the Netherlands) hoping thus to force a continuous monetary life support while confining future German (and Dutch) generations to a European Debt Union, to fiscal slavery. It is time for Plan B.

In his book 'War and Peace' the American economist John Maynard Keynes writes about the economic consequences of the Versailles Treaty. He quotes Lenin: 'There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency'. This is precisely what is now happening in the euro zone. Not brought on by Lenin, but by the euro itself.

There have been hidden structural deficiencies in the monetary union from the outset and now they emerge to haunt the EU. The euro has generated divergence because the monetary zone is comprised of too many countries with conflicting views on economic policy and too many wide-ranging monetary traditions. The cheap money flow- Mediterranean Europe borrowing money at German interest rates- increased labour costs, fuelled debts and crippled competitiveness. In addition, it also created a Spanish real estate bubble.

Since the single currency cannot devalue, many countries are in a process of 'internal devaluation': cutting state budgets, social security and salaries. Not the currency, but the country is being devalued, which causes political and social eruptions as we see these days in Greece. Such unrest even endangers the democratic system. Spain, Portugal and Italy are in the same straightjacket. France preaches profligacy, for as long as it lasts. If the euro zone does not reshape itself according to economic realities, it will implode. Reintroducing national currencies is undesirable because this process would be unmanageable, comparable to panic in a football stadium.

Recently, German Professor Markus Kerber launched a Plan B in Berlin. He proposes that core countries with a surplus on their current accounts (Germany, the Netherlands, Luxembourg, Finland and Austria) create a parallel currency within the euro zone: the Guldenmark. This currency would become the basis of a hard currency zone to which countries with fiscal discipline, like Denmark, Sweden, Estonia, Czech Republic and Slovakia could sign up. Simultaneously, the euro would devalue allowing Mediterranean Europe to regain its competitiveness.

The theory of parallel currencies is not new. At the beginning of the nineties, the Governor of the Bank of England, Leigh Pemberton, proposed a 'hard ECU' as parallel currency next to the national currencies of the then 12 EU member states. The 'hard ECU' would develop gradually, but the French refused it because they wanted to have a monetary grip on the reunited Germany. Therefore, the D Mark had to be replaced by a single currency: the euro. Ironically, just the opposite of what France had wished for happened: now Germany is in charge of monetary policy.

The Guldenmark would bring oxygen into a monetary system that currently smothers growth because the euro is too expensive for Mediterranean Europe. Ultimately, the euro zone is turning into a recession zone that fuels political and social explosions. The hard Guldenmark would borrow at a low interest rate and imports would also become cheaper. Does a hard currency threaten exportation? The German D Mark experienced several revaluations but Germany always remained export country number one. A hard currency area attracts investment, reinforces innovation and productivity. A soft currency will enable Mediterranean Europe to attract tourists and increase exports. A soft currency fits the economic mentality of Mediterranean Europe much better than a hard one, which is what the euro crisis has shown.

The advantage of the Guldenmark within the euro zone is that the euro zone need not be split, which would be a cumbersome and costly exercise. Instead, there will be an evolutionary process in which citizens and companies choose which currency fits their situation best. Germans will want to be paid in Guldenmark while Italian companies would prefer contracts in euro. There will be an automatic filtering according to economic realities: within the Guldenmark countries the euro will be gradually phased out. Are two currencies confusing? It will not be that troublesome in daily life because electronic payments enable citizens to carry little cash.

The American Harvard Professor Robert Barro published an article in the Wall Street Journal (10-1-2012) in which he proposed the reintroduction of the D Mark as parallel currency in the euro zone. However, Germany will never take that step alone. The German political elite are paralysed whenever some one invokes the word Alleingang. The German past stands in the way and Germany would only take that step together with other countries and in a velvet transition. Kerber offers an intellectual concept that reflects German sensitivities.

The European elite will immediately reject Plan B. The bureaucrats of Brussels would rather drive into a concrete wall at the speed of 100 km an hour than to admit that their single currency failed. To them, the euro is a matter of faith, for which Europe is now bleeding. The longer the euro zone muddles through, the sooner Plan B will become inevitable.

Derk Jan Eppink

Political Analyst

Derk Jan Eppink (1958) is former of the European Parliament and was vice president of the European Conservatives and Reformists (ECR). He worked as member of cabinet in the European Commission.

As a journalist he worked with NRC Handelsblad and De Standaard. At the moment he is senior fellow with the London Policy Center (LPC), a New York based think tank and he is foreign affairs columnist for the Dutch newspaper De Volkskrant.